Acquisition strategy involves finding a methodology for the acquisition of target companies that generates value for the acquirer. The use of an acquisition strategy can keep a management team from buying businesses for which there is no clear path to achieving a profitable outcome.

Instead of simple growth, an acquirer must understand exactly how its acquisition strategy will generate value. This cannot be a simplistic determination to combine two businesses, with a generic statement that overlapping costs will be eliminated. The management team must have a specific value proposition that makes it likely that each acquisition transaction will generate value for the shareholders. Some of these value propositions (strategies) are as follows:

Adjacent industry strategy. An acquirer may see an opportunity to use one of its competitive strengths to buy into an adjacent industry. This approach may work if the competitive strength gives the company a major advantage in the adjacent industry.

Diversification strategy. A company may elect to diversify away from its core business in order to offset the risks inherent in its own industry. These risks usually translate into highly variable cash flows which can make it difficult to remain in business when a bout of negative cash flows happen to coincide with a period of tight credit where loans are difficult to obtain. For example, a business environment may fluctuate strongly with changes in the overall economy, so a company buys into a business having more stable sales.

Full service strategy. An acquirer may have a relatively limited line of products or services, and wants to reposition itself to be a full-service provider. This calls for the pursuit of other businesses that can fill in the holes in the acquirer’s full-service strategy.

Geographic growth strategy. A business may have gradually built up an excellent business within a certain geographic area, and wants to roll out its concept into a new region. This can be a real problem if the company’s product line requires local support in the form of regional warehouses, field service operations, and/or local sales representatives. Such product lines can take a long time to roll out, since the business must create this infrastructure as it expands. The geographical growth strategy can be used to accelerate growth by finding another business that has the geographic support characteristics that the company needs, such as a regional distributor, and rolling out the product line through the acquired business.

Industry roll-up strategy. Some companies attempt an industry roll-up strategy, where they buy up a number of smaller businesses with small market share to achieve a consolidated business with significant market share. While attractive in theory, this is not that easy a strategy to pursue. In order to create any value, the acquirer needs to consolidate the administration, product lines, and branding of the various acquirees, which can be quite a chore.

Low-cost strategy. In many industries, there is one company that has rapidly built market share through the unwavering pursuit of the low-cost strategy. This approach involves offering a baseline or mid-range product that sells in large volumes, and for which the company can use best production practices to drive down the cost of manufacturing. It then uses its low-cost position to keep prices low, thereby preventing other competitors from challenging its primary position in the market. This type of business needs to first attain the appropriate sales volume to achieve the lowest-cost position, which may call for a number of acquisitions. Under this strategy, the acquirer is looking for businesses that already have significant market share, and products that can be easily adapted to its low-cost production strategy.

Market window strategy. A company may see a window of opportunity opening up in the market for a particular product or service. It may evaluate its own ability to launch a product within the time during which the window will be open, and conclude that it is not capable of doing so. If so, its best option is to acquire another company that is already positioned to take advantage of the window with the correct products, distribution channels, facilities, and so forth.

Product supplementation strategy. An acquirer may want to supplement its product line with the similar products of another company. This is particularly useful when there is a hole in the acquirer’s product line that it can immediately fill by making an acquisition.

Sales growth strategy. One of the most likely reasons why a business acquires is to achieve greater growth than it could manufacture through internal, or organic, growth. It is very difficult for a business to grow at more than a modest pace through organic growth, because it must overcome a variety of obstacles, such as bottlenecks, hiring the right people, entering new markets, opening up new distribution channels, and so forth. Conversely, it can massively accelerate its rate of growth with an acquisition.

Synergy strategy. One of the more successful acquisition strategies is to examine other businesses to see if there are costs that can be stripped out or revenue advantages to be gained by combining the companies. Ideally, the result should be greater profitability than the two companies would normally have achieved if they had continued to operate as separate entities. This strategy is usually focused on similar businesses in the same market, where the acquirer has considerable knowledge of how businesses are operated.

Vertical integration strategy. A company may want to have complete control over every aspect of its supply chain, all the way through to sales to the final customer. This control may involve buying the key suppliers of those components that the company needs for its products, as well as the distributors of those products and the retail locations in which they are sold.